Abstract
In this paper we demonstrate that the measurement of stock market efficiency is an important activity in establishing whether eastern European countries satisfy the Copenhagen Criteria for EU membership. Specifically, we argue that developing an efficient stock market should be an important policy focus for countries with aspirations to join the EU as it helps to demonstrate the existence of a functioning market economy. We illustrate this issue by examining the evolution of stock market efficiency in the Bucharest Stock Exchange from mid-1997 to September 2002. We use a GARCH model on daily price data and model the disturbances using the Student-t distribution to allow for ‘fat-tails’. We find strong evidence of inefficiency in the Bucharest Stock Exchange in that the lagged stock price index is a significant predictor of the current price index. This result is robust to the inclusion of variables controlling for calendar effects of the sort that have been observed in more developed stock markets. The level of inefficiency appears to diminish over time and we find evidence consistent with stock market efficiency in Romania after January 2000.
Similar content being viewed by others
References
A. Agrawal K. Tandon (1994) ArticleTitleAnomalies or illusions? Evidence from stock markets in eighteen countries Journal of International Money and Finance 13 83–106 Occurrence Handle10.1016/0261-5606(94)90026-4
R.A. Ariel (1987) ArticleTitle‘A monthly effect in stock returns’ Journal of Financial Economics 18 161–174 Occurrence Handle10.1016/0304-405X(87)90066-3
R.A. Ariel (1990) ArticleTitleHigh stock returns before holidays: existence and evidence on possible causes Journal of Finance 45 1611–2611 Occurrence Handle10.2307/2328753
G. Bekaert C.L. Harvey (1995) ArticleTitleTime varying world market integration Journal of Finance 50 403–444 Occurrence Handle10.2307/2329414
G. Bekaert C.L. Harvey (1997) ArticleTitleEmerging equity market volatility Journal of Financial Economics 43 29–77 Occurrence Handle10.1016/S0304-405X(96)00889-6
T. Bollerslev (1986) ArticleTitleGeneralized autoregressive conditional heteroskedasticity Journal of Econometrics 31 307–327 Occurrence Handle10.1016/0304-4076(86)90063-1
T. Bollerslev (1987) ArticleTitleA conditional heteroscedastic time series model for speculative prices and rates of return Review of Economics and Statistics 69 542–547 Occurrence Handle10.2307/1925546
Bucharest Stock Exchange (2001), Annual Report, Bucharest.
J.Y. Campbell A.W. Lo A.C. MacKinlay (1997) The Econometrics of Financial Markets Princeton University Press Princeton
W.W. Charemza E. Majerowska (2000) ArticleTitleRegulation of the Warsaw Stock Exchange: the portfolio allocation problem Journal of Banking and Finance 24 555–576 Occurrence Handle10.1016/S0378-4266(99)00080-1
S. Claessens S. Dasgupta J. Glenn (1995) ArticleTitleReturn behaviour in emerging stock markets The World Economic Review 9 131–151 Occurrence Handle10.1093/wber/9.1.131
R. Connolly (1989) ArticleTitleAn examination of the robustness of the weekend effect Journal of Financial and Quantitative Analysis 24 133–169 Occurrence Handle10.2307/2330769
R.B. D’Agostino A. Balanger R.B. D’Agostino SuffixJr (1990) ArticleTitleA Suggestion for using Powerful and Informative Tests of Normality The American Statistician 44 IssueID4 316–321 Occurrence Handle10.2307/2684359
J.P. Dickinson K. Muragu (1994) ArticleTitleMarket efficiency in developing countries: A case study of the Nairobi Stock Exchange Journal of Business Finance & Accounting 21 IssueID1 133–150 Occurrence Handle10.1111/j.1468-5957.1994.tb00309.x
K. Dowd (2002) Measuring Market Risk Chichester John Wiley and Sons
R. Emerson S.G. Hall A. Zalewska-Mitura (1997) ArticleTitleEvolving market efficiency with an application to some Bulgarian shares Economics of Planning 30 75–90 Occurrence Handle10.1023/A:1003053807165
R.F. Engle (1982) ArticleTitleAutoregressive conditional heteroskedasticity with estimates of the variance of U.K. inflation Econometrica 50 987–1008 Occurrence Handle10.2307/1912773
European Bank for Reconstruction and Development (1998), Transition Report: Financial Sector in Transition, London.
Filer, R.K., Hanousek, J. and Campos, N.F. (1999), Do Stock markets Promote Economic Growth? William Davidson Institute, Working Paper 267.
Fortune, P. (1999), Are Stock Returns Different over Weekends? A Jump Diffusion Analysis of the ‘Weekend Effect’, New England Economic Review September/October 4–19.
K.R. French (1980) ArticleTitleStock returns and the weekend effect Journal of Financial Economics 8 55–69 Occurrence Handle10.1016/0304-405X(80)90021-5
R.G. Gelos R. Sahay (2001) ArticleTitleFinancial market spillovers in transition economies Economics of Transition 9 IssueID1 53–86 Occurrence Handle10.1111/1468-0351.00067
M.R. Gibbons P. Hess (1981) ArticleTitleDay of the week effect and asset returns Journal of Business 54 579–596 Occurrence Handle10.1086/296147
B. Gordon L. Rittenburg (1995) ArticleTitleThe Warsaw Stock Exchange: a test of market efficiency Comparative Economic Studies 37 IssueID2 1–27 Occurrence Handle10.1057/ces.1995.7
M.N. Gultekin N.B. Gultekin (1983) ArticleTitleStock market seasonality: international evidence Journal of Financial Economics 12 469–481 Occurrence Handle10.1016/0304-405X(83)90044-2
G.E. Ibrahim A. Cooke D. Paton (2002) ArticleTitleHave lower real wages helped industrial restructuring in Romania? Journal of Development Studies 39 165–180 Occurrence Handle10.1080/00220380412331322711
G.E. Ibrahim V. Galt (2002) ArticleTitleBye-bye central planning, hello market hiccups: institutional transition in Romania Cambridge Journal of Economics 26 106–118 Occurrence Handle10.1093/cje/26.1.105
C. Jochum G. Kirchgasser M. Plater (1999) ArticleTitleA long-run relationship between Eastern European stock markets? Cointegration and the 1997/98 crisis in emerging markets Weltwirtschaftiches Archiv 135 454–479 Occurrence Handle10.1007/BF02707335
D.B. Keim R. Stambaugh (1984) ArticleTitleA further investigation of the weekend effect in stock returns Journal of Finance 39 819–835 Occurrence Handle10.2307/2327945
C.W. Kim K. Park (1994) ArticleTitleHoliday effects and stock returns: further evidence Journal of Financial and Quantitative Analysis 29 145–157 Occurrence Handle10.2307/2331196
I. Lee (1992) ArticleTitleStock market seasonality: some evidence from the Pacific-Basin countries Journal of Banking and Finance 19 199–201
Levine, R. (1997), ‘Financial Development and Economic Growth: views and agenda’, Journal of Economic Literature 35(June), 288–726.
Lucas, R.E., Jr. (1978), ‘Asset Prices in an Exchange Economy’, Econometrica 46, 6(Nov.), .1429–14.
Mendleson, M. and Peake, J.W. (1993), ‘Equity Markets in Economies in Transition’, Journal of Banking and Finance 17, 5, September.
T.C. Mills J.A. Coutts (1995) ArticleTitleCalendar effects in the London Stock Exchange FT-SE indices European Journal of Finance 1 79–93 Occurrence Handle10.1080/13518479500000010
Morley, B and Pentecost, E.J. (1998), ‘Asset pricing and foreign exchange risk: econometric evidence for the G-7’, Journal of International Money and Finance, 17, 2 (April), 317–329.
J.-P. Nivet (1997) ArticleTitleStock markets in transition; the Warsaw experiment Economics of Transition 5 171–183 Occurrence Handle10.1111/j.1468-0351.1997.tb00009.x
Rajan, R.G. and Zingales, L. (1996), ‘Financial dependence and growth,’ NBER Working Paper 5758, NBER.
M. Rockinger G. Urga (2000) ArticleTitleThe evolution of stock markets in transition economies Journal of Comparative Economics 28 456–472 Occurrence Handle10.1006/jcec.2000.1669
M. Rockinger G Urga (2001) ArticleTitleA time varying parameter model to test for predictability and integration in the stock markets of transition economies Journal of Business and Economic Statistics 19 IssueID1 73–84 Occurrence Handle10.1198/07350010152472634
Rogalski, R.J. and Tinic, S.M. (1986), ‘The January size effect: anomaly or risk mismeasurement’, Financial Analysts Journal, November–December, 63–70.
M.S. Rozeff Kinney SuffixJr W.R. (1976) ArticleTitleCapital market seasonality: the case of stock returns Journal of Financial Economics 3 379–402 Occurrence Handle10.1016/0304-405X(76)90028-3
K.K. Shields (1997) ArticleTitleThreshold modelling of stock return volatility on Eastern European markets Economics of Planning 30 107–127 Occurrence Handle10.1023/A:1003007708074
Smith, G. and K. Jefferis (2002), The evolving efficiency of African stock markets, www.2. soas.ac.uk/Economics/staff/gsmith/EffiAfSm.pdf.
Young, P. and Reynolds, P. (1995), ‘Amnesia of reform: A review of post-communist privatisation’, excerpted in World Bank, Transition: the newsletter about reforming economies 6, 1–2 (January-February), 15–16.
A Zalewska-Mitura S.G. Hall (1999) ArticleTitleExamining the first stages of market performance: a test for evolving market efficiency Economics Letters 64 1–12 Occurrence Handle10.1016/S0165-1765(99)00074-9
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Harrison, B., Paton, D. Transition, the Evolution of Stock Market Efficiency and Entry into EU: The Case of Romania. Econ Change 37, 203–223 (2004). https://doi.org/10.1007/s10644-005-5060-y
Received:
Accepted:
Issue Date:
DOI: https://doi.org/10.1007/s10644-005-5060-y